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Earnest Money: How It Works in the DFW Real Estate Market

The housing market throughout DFW has become very competitive — with some homes being sold before they appear on the market. In this market, some buyers use earnest money to gain a competitive edge. How does earnest money work? Read on.

In the last two years, the Dallas-Fort Worth area has seen a shortage of homes in relation to demand. Since the recession slowed down construction, the housing market throughout DFW has become very competitive — with some homes being sold before they appear on the market. “A surge in buyer demand and the tightest supply of houses for sale in 20 years has sent the local residential market into warp drive,” the Dallas Morning News reported. In this market, some buyers use earnest money to gain a competitive edge, in addition to other tactics.

Earnest Money: The Basics

The sum of money the buyer offers to the seller to convey intent to purchase a home is known as earnest money. This amount offered can vary. For instance, in competitive markets, some buyers choose to offer larger sums of earnest money than they would in a less competitive situation. When determining if and how much money to offer a seller, the home buyer should consider the value of the home in comparison to similar homes in the area and whether the home may receive multiple offers quickly.

When this sum of money is offered to a buyer, it does not go directly to the homeowner until the selling transaction is complete. Instead, earnest money is kept in its own account like a trust that’s usually held by the mortgage company or a broker’s account. Once the money has been placed in the account, it becomes the joint possession of both the seller and the buyer.

What Happens if a Real Estate Deal Falls Through?

If a real estate deal falls through for common reasons (such as an inspection revealing serious problems with a home), the money normally is returned to the buyer without much friction. However, if a buyer has backed out of a deal — especially later on in the transaction — the seller may request to keep a portion or all of the earnest funds. A seller may want to keep earnest money for a number of reasons, including to cover fees associated with the sales process and time lost while the home was off the market during the failed transaction.

When real estate deals fall through later in the selling process, the ownership of earnest funds can become a complicated matter. For this reason, buyers should not place earnest funds on a home unless they’re truly interested in buying it and intend to follow through with their contractual obligations — save for common reasons to back out, such as a bank’s appraisal not matching up with the home’s selling price or extensive problems found during an inspection.

To gain an understanding of this real estate tactic and their rights, buyers should discuss all aspects of earnest funds with a trusted real estate broker or lawyer.